Canada's 'housing bubble' deemed close to bursting

[whatnext]

Originally Posted by someone123

It helps that Vienna has barely grown over the past 100 years. It's not experiencing the same development pressure that Vancouver or Toronto are.

Then maybe we should throttle back on immigration if it is driving housing to unaffordable levels. It doesn't seem to be hurting Austria at all.

[ssiguy]

The problem with cutting back on immigration is that Canada needs those immigrants as they are well skilled and very importantly younger than the population at large which is quickly aging. Canada wants their money to help prop up the soaring medical and retirement costs of an older population.

Canada has the lowest birth rate in the entire English and French speaking world and without them our population would stabilize while the number of older dependents on government services would skyrocket in proportion to the number of people who are paying taxes into the system.

[whatnext]

Originally Posted by ssiguy

The problem with cutting back on immigration is that Canada needs those immigrants as they are well skilled and very importantly younger than the population at large which is quickly aging. Canada wants their money to help prop up the soaring medical and retirement costs of an older population.

Canada has the lowest birth rate in the entire English and French speaking world and without them our population would stabilize while the number of older dependents on government services would skyrocket in proportion to the number of people who are paying taxes into the system.

According to Wikipedia, Austria's 2018 fertility rate is 1.48, lower than Canada's 1.49. The old saw about aging workers is outdated. Technology and longer life spans are renderig it obsolete.

[misher]

Originally Posted by whatnext

Since liveability survey crop up so often on SSP, it is worth noting that Vienna usually tops the list. And they do it woth strict rent controls, subisidized housing and without a forest of bland highrises:

Vienna effortlessly tops the world’s most liveable city surveys, and for good reason. Its citizens – 1.8 million at the last count – enjoy affordable public transport, abundant greenery and rents UK citizens could only dream of. In fact, acccommodation in Vienna is plentiful and cheap, making it one of the most affordable places to live. In this compact city, dominated by four- and five-storey, walk-up mansion blocks, tenants have been known to snag flats with palace views, free heating and Alps mineral water on tap. More than 80% of residents rent, and two-thirds of Viennese citizens live in municipal or publicly subsidised housing. Eight out of ten flats built in the city today are financed by Vienna’s housing subsidy scheme. This quality and range helps push down rental prices, meaning low-paid workers can afford to live in the Austrian capital, even in the city centre. They often live centrally and enjoy its cheap amenities, short commutes and, thanks to a sound economy, jobs – even when renting on the partially regulated private market...

....Vienna spends more than €570m a year on subsidising, constructing and preserving public housing despite having a population nearly eight times smaller than the UK capital. Annual government funding for affordable housing in London, with a population of around 8.7m, is only around £500m, less than half the amount spent in 2009/10 and London’s mayor, Sadiq Khan, says this needs to increase to 2.7bn a year to prevent the housing crisis from getting worse. Vienna also wants to do more, last year committing to increasing annual housing production by 30% in order to meet demand.

“It’s been so very important to be close to my working place and that is possible in Vienna (especially after the night shift),” says Hammer.

“Tenancy regulations are so important for living sanely, so, yes, I’m a big fan of rent controls and of Vienna. If I had to spend 79% of my income [on rent, like in London] then I think I’d have to leave Vienna because that’s insanely expensive,” she says.

https://www.theguardian.com/society/2017/dec/12/vienna-housing-policy-uk-rent-controls

Its almost as if Vienna has land everywhere and isn't constrained by water and mountains on multiple sides. Also because they aren't a major port they don't have much industrial or warehouses. They've also demolished most of their detached housing for condos, try that in Vancouver.



Also note how much of the public housing looks alike. Our left wing has determined that creates ghettos.



Also Vienna is facing a housing crisis as well:

Rental prices for new properties have risen steeply, by 21 percent, with average costs now €11,50 per square metre. In Vienna council-owned properties, where rents tend to be cheaper and only rise according to inflation, are in high demand. Wiener Wohnen says it currently has 13,100 people on its waiting list, who have registered their interest in renting a council flat.

The fact that property prices are increasing should be cause for alarm, says Georg Spiegelfeld, president of the Austrian brokerage network Immobilienring IR. “There are not enough properties available and this problem will increase. Around 300,000 people are expected to move to Vienna over the next few years… and the city has not prepared for this.”

He said that the only answer is to “build, build, build and redesign”.

https://www.thelocal.at/20170228/austria...round-39-percent-more-than-six-years-ago

[lio45]

Originally Posted by misher

An amazing article about how our left wing cities are doing their best to screw over new renters.



https://www.westerninvestor.com/news/opi...rentals-as-vancouver-stumbles-1.24039073

The answer is much simpler than that.

ANY city where property prices are grossly inflated by speculation will observe that the free market doesn't willingly build rentals there any more.

It's simple math. Inevitable.

The only "solutions" are 1) the govt steps in and builds social housing or 2) take drastic measures to deflate the property prices bubble, bringing cap rates back up to levels where rentals start to be viable.

[milomilo]

And definitely, definitely do not implement rent controls.

[lio45]

Yep. Vienna's main recipe ingredient isn't the rent control, it's the fact that ~70% of the rental housing is government-owned. If Vancouver did that they'd have more affordable housing than now for sure, and by a good bit. But this approach has downsides too, obviously, and I'm not sure it would be very popular. (Among Van renters, sure; BC taxpayers, probably not.)

[lio45]

Originally Posted by lio45

The answer is much simpler than that.

ANY city where property prices are grossly inflated by speculation will observe that the free market doesn't willingly build rentals there any more.

It's simple math. Inevitable.

Not sure how clear this is already or if it would be of any use to further illustrate the idea, but if you look at typical numbers for a Quebec Midsize City you can see why the free market tends to naturally build a mix of rentals and condos.

Construction cost $x per unit (including land) (where $x < $120k)
Selling price per unit of the finished product (if sold as condos): ~$120k
Monthly rent per unit of the finished product (if kept as rentals): ~$800

You can see that in this case, both types make approximately the same financial sense, so it's mostly going to depend on whether the developer/builder prefers to sell the units as individual units to owner-occupiers, or prefers to sell the whole building to an interested landlord, or is himself in the landlording business and intends to keep the rental building after constructing it.

Now if you look at (very rough guesstimate) Vancouver numbers:

Construction cost $y per unit (including land) (where $y < $1M)
Selling price per unit of the finished product (if sold as condos): ~$1M
Monthly rent per unit of the finished product (if kept as rentals): ~$1200

The only way to make money as a builder in this market is to be selling what you're building as condos, so that's what everyone will do.

[someone123]

Originally Posted by lio45

Construction cost $y per unit (including land) (where $y < $1M)
Selling price per unit of the finished product (if sold as condos): ~$1M
Monthly rent per unit of the finished product (if kept as rentals): ~$1200

The only way to make money as a builder in this market is to be selling what you're building as condos, so that's what everyone will do.

I agree with your point completely. Your numbers are off though.

$1M buys you a low-end suburban house in Metro Vancouver, a mid-range suburban condo, or a low-end urban condo (location, quality, size: you can pick two for $1M). These rent for more like $2500-3000 a month. The math still doesn't work out for purpose-built rentals though, or often even renting out existing property (due to the hassle and risks of having tenants; one unit I know of was completely trashed, worth about $700k, and at the time probably rented for $1500 to tenants who were there for a few years). A lot of people lose money, let alone earn a return equal to that of other much easier potential investments. They do this of course because they think the prices will go up by ~10% per year indefinitely. This year's assessments are way down.

It's hard for me to imagine a scenario where I'd want to rent out my place. If I weren't living in it I'd sell and somebody else can either move in, speculate on it, or make the mistake of renting it out. One way to look at this is that a market can be so flooded with bad investors that there's little opportunity left.

[ssiguy]

Originally Posted by whatnext

According to Wikipedia, Austria's 2018 fertility rate is 1.48, lower than Canada's 1.49. The old saw about aging workers is outdated. Technology and longer life spans are renderig it obsolete.

I didn't know Austria was now part of the English & French speaking world.

Regardless of Austria's linguistic change, those immigrants are younger than most Canadians which means they can fill the high skill occupations and pay into the tax system as an every increasing number of Canadians go from taxpayers to tax collectors. They are also in their reproductive years meaning their children will also be paying into the system when they enter the labour force.

Another issue which is equally problematic is that much of Canada's economic growth over the last decade has rested upon the very non-productive real estate sector. BC is the poster child of allowing your real estate to command your economy and it's a false economy based on little more than a ponzi scheme. It's based upon nothing but money changing hands and not productivity gains which is why Canada has had a decent economic record since the financial crisis but our productivity levels continue to decline in relation to our OECD contemporaries.

Now, due to this reliance on real estate it takes ever more people {ie immigrants} to keep the sector growing.

[lio45]

Originally Posted by someone123

I agree with your point completely. Your numbers are off though.

$1M buys you a low-end suburban house in Metro Vancouver, a mid-range suburban condo, or a low-end urban condo (location, quality, size: you can pick two for $1M). These rent for more like $2500-3000 a month. The math still doesn't work out for purpose-built rentals though, or often even renting out existing property (due to the hassle and risks of having tenants; one unit I know of was completely trashed, worth about $700k, and at the time probably rented for $1500 to tenants who were there for a few years). A lot of people lose money, let alone earn a return equal to that of other much easier potential investments. They do this of course because they think the prices will go up by ~10% per year indefinitely. This year's assessments are way down.

It's hard for me to imagine a scenario where I'd want to rent out my place. If I weren't living in it I'd sell and somebody else can either move in, speculate on it, or make the mistake of renting it out. One way to look at this is that a market can be so flooded with bad investors that there's little opportunity left.

Thanks for the numbers.

So here are the two possible scenarios where the free market in Vancouver would naturally be building the same balance of condos and rentals as we see around here:

Scenario 1:

Realistic monthly rent of finished product: ~$2,500
Realistic selling price (>construction costs including land): ~$300k*

Scenario 2:

Realistic selling price (>construction costs including land): ~$1M
Realistic monthly rent of finished product: ~$8,000*


Neither is possible:

* absolutely impossible as long as land values continue to be grossly inflated by external speculation

* absolutely impossible as long as Vancouver wages continue to be at the levels they currently are

It's that simple.

[someone123]

Another angle of this that's relevant is that in metro Vancouver zoned high density land is metered out through zoning constraints and the oligopoly of large-scale developers. On top of this there's only so much construction and labour capacity in the region (tradespeople have historically been much better off in Alberta). It's possible for condo construction to "starve" the supply of rental developments even if a purpose-built rental could still be profitable.

It's about opportunity cost as much as it is about profitability, which makes the solution easier to solve economically. I don't think we're in a situation where it has to be uneconomical or economically challenging to build rental housing in Vancouver. If the region started to zone extra land just for rentals we'd get rentals. To improve affordability significantly there would have to be a lot of this land though, and it would have to come on top of the existing developments. I think there's been some discussion of this (e.g. rental zoning) but the scale of it is way too small. Vancouver needs perhaps 15,000 new rentals a year to remain affordable and 100,000-300,000 to make up for the existing shortage.

A "hard" housing problem would be if Vancouver were full of destitute people who couldn't afford to pay enough for housing to cover construction costs and materials. That is not the problem we have. Instead we have plenty of people with good wages and purchasing power who are losing out because of unfriendly regulation and a lack of competition in the market.

[milomilo]

Originally Posted by lio45

Yep. Vienna's main recipe ingredient isn't the rent control, it's the fact that ~70% of the rental housing is government-owned. If Vancouver did that they'd have more affordable housing than now for sure, and by a good bit. But this approach has downsides too, obviously, and I'm not sure it would be very popular. (Among Van renters, sure; BC taxpayers, probably not.)

It's virtually impossible for the government to build enough social housing to make a difference to affordability, if it's entering into an already "overpriced" market. There is zero chance the government can build housing cheaper than the private sector can, unless they can break the rules (and if you do that, what's the point of the rules?). So for the government to build enough housing that it actually causes prices to fall would cost an obscene amount of debt and probably cause a recession in the process.

So the private sector has to increase supply, and the problem here is NIMBYs. The NIMBY's power needs to be completely and utterly destroyed for progress to be made, but there's no chance of that happening. So the problem of high house prices will continue indefinitely.

[someone123]

Originally Posted by milomilo

The NIMBY's power needs to be completely and utterly destroyed for progress to be made, but there's no chance of that happening. So the problem of high house prices will continue indefinitely.

I am not so sure about this. Politically we've been seeing peak Baby Boomer but that's going to change, and electorally it may work a little differently when instead of a monolithic bloc of Boomer homeowner voters there's a smaller mix of older seniors combined with corporate and investment owners and then some lucky younger heirs who have a bunch of friends and family in their cohort who didn't do so well. Another advantage in Canada is that municipal governments are generally completely controlled by the provinces, so municipal level NIMBYs only have so much power. NIMBYism is weaker in Canada than in the US.

[lio45]

Originally Posted by milomilo

So for the government to build enough housing that it actually causes prices to fall would cost an obscene amount of debt and probably cause a recession in the process.

I was going to disagree that it's "impossible", but we're in agreement on that - to reach the Vienna-matching point where ~70% of all Vancouverites live in social housing as renters, you probably need to raise income taxes on all working BCers to something like 80%, and at this point the volumes of equalization transfers from Ottawa to Victoria would make Rural New Brunswick and Fort McMurray and everything in between all "have" areas of the country, and politically I don't think this would work for long before all other provinces alter the equalization formula to address the black hole that BC has become.

But it wouldn't be strictly "impossible". At least for a while.

[lio45]

Originally Posted by someone123

I don't think we're in a situation where it has to be uneconomical or economically challenging to build rental housing in Vancouver. If the region started to zone extra land just for rentals we'd get rentals.

Sure, as long as it's possible to beat one's cost of capital building rentals. So if you can build (including land) for no more than ~$400k an unit, and those units can rent for at least $2,500 a month, then yeah, that's viable - provided of course you don't allow these ~$400k units to be bought by billionaire Chinese money launderers for ~$1M. If you do, then as I mentioned earlier, no one will be keeping these units as rentals.

So, yeah, I'm with you, one of the only ways (along with a couple others: heavy foreign ownership taxes, stricter controls of the money entering Canada) to help fix the problem is rental-only zoning + allowing whatever level of density is needed to keep the construction cost per unit under the point where cap rate is equal to minimum opportunity cost of capital.

Then the free market will show up and do it, because it's profitable and it's also the most profitable thing to do in those locations since condos are now off the table.

[lio45]

There's one thing that I am not getting, though. You (someone123) and I both agree that rental-only zoning would work well (it harms land values then funnels development into the only one type that is allowed; in practice it's guaranteed that land values in areas where you can't do anything but multifamily rental will fall until the point where it becomes financially viable to do multifamily rental there) ... yet ...

That guy quoted on last page, Andrey Pavlov, PhD, a professor of real estate finance in the Beedie School of Business at Simon Fraser University, says pretty much the diametrical opposite of us about rental-only zoning. And he doesn't explain his view.

Can anyone help me here? He's clearly totally wrong, at first sight. There's got to be something I'm missing.

UNLESS what he means is, "I agree with someone123 and lio45 that rental-only zoning would work in theory, but in practice property owners in these areas will hold out and wait until the people who mandated rental-only zoning get kicked out of office and replaced by people who will eliminate rental-only zoning and re-open the speculation potential of that land".

And if so, that's stupid. It's like saying crippling gas taxes "don't work" to reduce fuel usage, because in practice, people will choose to keep their V8 4x4 Chevy Suburbans and temporarily endure the new prices for the few days/weeks it will take until angry popular backlash forces politicians to bring fuel prices back to where they were before.

That's not "it doesn't work", it's "it totally works but we believe people right now wouldn't tolerate it so we don't think we should attempt it at the moment".

So... if that was his point, then he's wrong - if rental-only zoning gets introduced and it is stated clearly that it's there to stay, it'll work.

[whatnext]

Originally Posted by lio45

There's one thing that I am not getting, though. You (someone123) and I both agree that rental-only zoning would work well (it harms land values then funnels development into the only one type that is allowed; in practice it's guaranteed that land values in areas where you can't do anything but multifamily rental will fall until the point where it becomes financially viable to do multifamily rental there) ... yet ...

That guy quoted on last page, Andrey Pavlov, PhD, a professor of real estate finance in the Beedie School of Business at Simon Fraser University, says pretty much the diametrical opposite of us about rental-only zoning. And he doesn't explain his view.

Can anyone help me here? He's clearly totally wrong, at first sight. There's got to be something I'm missing.

UNLESS what he means is, "I agree with someone123 and lio45 that rental-only zoning would work in theory, but in practice property owners in these areas will hold out and wait until the people who mandated rental-only zoning get kicked out of office and replaced by people who will eliminate rental-only zoning and re-open the speculation potential of that land".

And if so, that's stupid. It's like saying crippling gas taxes "don't work" to reduce fuel usage, because in practice, people will choose to keep their V8 4x4 Chevy Suburbans and temporarily endure the new prices for the few days/weeks it will take until angry popular backlash forces politicians to bring fuel prices back to where they were before.

That's not "it doesn't work", it's "it totally works but people right now wouldn't tolerate it so we don't think we should attempt to do it at the moment".

So... if that was his point, then he's wrong - if rental-only zoning gets introduced and it is stated clearly that it's there to stay, it'll work.

Well, the Beedie School of Business at SFU is named after the developer Beedie family....

[ssiguy]

Vancouver will never have an affordable rental market until there is a MAJOR price correction in real estate prices.

In Vancouver you have tens of thousands of relatively decent wage earners who in the rest of the country wpuld buy a condo or house stuck in the rental market because their $100k income qualifies them for practically nothing. Also, even the 5% down is nearly impossible to save for which is one of the reasons Vancouver has such grotesque socio-economic stratification...……….unless your parents are wealthy you are stuck in the rental market for good.

In Vancouver it's the price of land that is the problem and it's based on dirty Chinese money. Vancouver {without needing any authorization from Victoria} could fix the problem overnight if it wanted to but most assuredly doesn't. All they would have to do is bring in zoning restrictions where you buy the current home, if you decide you want more space or the proper Feng Shui, you are only allowed to increase the size of the home by, for example, 20% and you are not allowed to tear the house down.

All of a sudden those $1.5 million shacks in a lousy and crime ridden neighbourhood would only be bought by people who...……...wait for it...…….. are actually willing to live in them and not tear them down to build something else to remain empty.

[someone123]

Originally Posted by lio45

So... if that was his point, then he's wrong - if rental-only zoning gets introduced and it is stated clearly that it's there to stay, it'll work.

My impression is he was writing more about rental zoning as implemented in metro Vancouver than the full range of potential uses of rental zoning.

When I talk about rental zoning I imagine taking some bland part of inner metro Vancouver like the area around Commercial Drive or Renfrew SkyTrain stations, draw a 2 km circle, and then allow 40 storeys as-of-right for any rental development. Towers would be built in these areas, they'd have a lot of units, they'd have good transportation connections, and they would be cheaper than the investor-class ones being built around, say, Brentwood or Oakridge.

In practice in metro Vancouver the cities have been trying to use rental zoning as a tool to restrict development. Often they don't even up-zone anything, they just re-zone a site with an N storey rental building from general purpose to rental only of the same height. I agree this won't help with affordability, since it doesn't increase supply, but the phenomenon doesn't prove that rental zoning in general is useless.

Vancouver's municipal and regional planning level politics are surprisingly terrible and disconnected from the realities of what the growing metro area needs. For example we have bridge replacement projects where there is a debate about whether or not to add extra lanes beyond the scale of what exists on the to-be-replaced 1930's-era bridge, and the no new lanes camp appears to have won. And everyone can agree in principle that transit is so great and we shouldn't rely on cars (so let's not build any new car infrastructure!) but the city is averaging perhaps 1 km of new rapid transit per year. The extension to UBC announced in 2008 is hopefully going to be 50% completed by 2025.